Real Estate Tax Liens

While most of the people do not like paying taxes, for some, the word "tax" is synonymous with "opportunity." Taxes can sometimes be very profitable. Just ask those who own tax credits or participate in tax lien auction process. In fact, a whole new industry has sprung up from the people that scour local auctions for real estate sales, caused by delinquent taxes. These forced sales, or tax lien sales are becoming more and more streamlined and popular with the general public.

What is a Real Estate Tax Lien

In most areas, when a property owner is late on paying real property taxes, the county or municipality will issue a tax lien on that person's property. Certain states do allow the tax lien to become a first lien on the property, which is then turned around and sold at auction as a tax lien certificate. After placing the successful bid, buyers of a government-issued tax lien certificate will then get one of two things:

1) A yield mandated by the state from the lien, which the delinquent taxpayer must pay in order to release the lien, OR

2) Title to the property if the delinquent taxpayer fails to pay up.

Individuals have been buying up tax liens more and more because of these two benefits. A fixed percentage rate, mandated by a government agency, or the title to property at a substantial discount, the incredible benefits rarely seen with other real estate transactions.

Risks In Doing It Alone

The rewards of tax liens seem very promising. Who would balk at the chance to pay a fraction of the cost for a new home, either to collect a fixed penalty from the homeowner or the property itself.

However, what many tax lien buyers to their dismay find out is that, if they did not do proper title and bankruptcy research, their tax liens can become worthless.

For instance, creditors and the IRS can take priority over tax lien holders in cases where the original owner of the property files for bankruptcy.

In addition, many people do purchase properties sight unseen, going just on the description posted prior to auction. Without actual inspections and geographical surveys, sometimes these deeds are worth little more than the paper they are printed on.

Imagine the surprise of a property owner in Texas who, at auction, thought he got a deal on 2 acres of property for ,000 only to realize later that the property is completely flooded twice a year.

Yet institutions like credit unions and banks have always been able to overcome many of these conditions because they had the resources to build relationships with local real estate agents, do the proper title searches and property inspections.

These firms realized the vast potential in tax liens, provided they could "cover their bases" and ensure each tax lien purchase was a sound one.

Individual tax lien purchasers are often taken in to buying without doing full inspections of each property they purchase. At auction, tax liens are generally issued based on lot number. Purchasers simply have no idea whether they are buying a four-bedroom house or a plot of dirt without inspecting the property. Physical inspections do take time, energy and money, and often limits tax lien purchasers to properties within a small area.